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Market wrap-up — February 27, 2023

Last week was a rather difficult one and pretty much all equity indices retreated, with US indices losing more than 2%. Economic prints from the United States showed that the economy is still quite strong and that the long-awaited softer prices may not be around the corner.

I have to say that the week was rather flattish until an important inflation indicator came out. The PCE (Personal Consumption Expenditure) in January was published at 5.4% when economists were expecting it at 5% and the previous one was 5.3%. This suggests that inflation could stay at elevated levels for longer, which would encourage the Fed to keep tightening its monetary policy to new and unanticipated highs.

As you know, rate moves from a central bank first impacts the front-end of the rate curve. Therefore, we saw 2Y US yields climb to 4.85%, a level not seen since 2007. After a first month of blind optimism this year, the uncertainty around the length of the period with high rates that is going to be needed is starting to hit the market. Right now, no one knows how bad this could impact growth. If you look at Fed fund rates, they are now pricing in a 100% probability of a 25-bp rate hike in March and a terminal rate at 5.40%, that is a huge move from 4,80% a few weeks ago.

Obviously, with this yield move comes a growing strength of the US dollar against most currencies and assets. EURUSD is back around 1,06 after reaching up to 1.09 earlier this year.

Gold and crude oil are no exceptions. They are both giving up ground against the greenback and one could say gold is doing a pretty poor job at hedging inflation thus far.

In February, overall, the market sentiment was mixed, even more so if you compare it to January. But although it’s true that there was less euphoria recently, markets are still very much in green territory. The S&P 500 is still up 5% year-to-date, several European indices have benefited from double-digit performances and bitcoin is up 40%+ since the beginning of the year. So that’s still a very good start to the year.

Looking at March, the ECB will most likely raise rates by another 50bps. Christine Lagarde herself said that this should be expected and that following rate decisions will depend on economic data. But one should not doubt her determination to bring inflation back to 2%.

Macro-economic data on both sides of the Atlantic will therefore continue to be the key market drivers going forward. This is even more the case now that the earning season is, for the most part, behind us.

Here are a few data to watch this week. First, we start with the consumer confidence tomorrow, then the ISM on Wednesday and on Thursday we will be closely monitoring the Eurozone inflation data. And on Friday, we go back to the United States for the PMI indices. And let’s see what the market makes of it and how yields will react.

Johan Thomyris



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